Embrace the Crazy Ideas: Nontraditional Financial Planners

I think of myself as a part-time futurist, and I try hard to help FP's readers anticipate major trends rather than get blindsided by them. In this game, you quickly learn that crystal balls give you nothing more than a murky reflection of your aging face, and tea leaves are an imperfect guide to the next major innovation in dynamic asset allocation.

So I've developed a different model from the gypsies and fortune tellers: I look for the crazies. These are the people who abandon well-established business models for the "insane" reason that they want to give their clients something better. I call them crazies because, in the pioneering stages, it's sometimes hard to see how they're going to make money.

EARLY VISIONARIES

A classic example is the advisors who first dabbled in the portfolio management service model. This was in the early 1990s, before any of the broker-dealer AUM platforms and institutional back offices, back when you had to ask clients to photocopy their statements so that you could hand-enter their data on a spreadsheet to create performance reports. Whenever I hear Schwab Advisor Services executives boast about their visionary foresight in developing the first institutional platform, I think back to a NAPFA conference in the early 1990s, when Hugo Quackenbush, then a senior Schwab executive, was badgered mercilessly by advisors who were begging him to please, pretty please, send them duplicate performance statements if their clients would sign an authorization.

While everybody else was selling high-commission partnerships and mutual funds, these advisors were building no-load portfolios, and hadn't yet figured out how to charge a percentage of assets under management. "How do you make money doing this?" I asked with some perplexity. The cheerful answer: "We're not quite sure yet. All we can tell you is that our clients love it."

I knew right then that I was watching the early phase of a major trend. These people, who now run some of the largest planning shops in the profession, were clearly insane.

INSANE OR INSPIRED?

I've run across another person recently who fits the crazy mold, who may be as accurate a barometer of the future as my old fee-compensated friends were way back when. Joe Duran, founder and CEO of United Capital Financial Advisors in Newport Beach, Calif., was actually a leading member of the crazies back then, as well. Instead of managing client portfolios himself, he created a firm that facilitated the AUM activities of advisors before any of the custodial platforms existed. "When we started, people said to me: 'Charging a fee to manage mutual fund portfolios - who would pay for that?' " Duran recalls. "We're already doing that. And I said: 'You're just recommending mutual funds for a commission. Why not charge for it directly and actually do it?' It was a crazy idea," he admits cheerfully, "but it worked."

That firm was eventually sold to General Electric Financial, and is now Genworth Financial Asset Management. "We were one of the first, if not the first, open-architecture, no-proprietary-product custodian and investment advisory firm," Duran says. "I was fortunate that we were able to ride the big AUM trend over the next 15 years."

The sale left Duran, who was 34 at the time, with a tidy sum of money and no clear idea what crazy thing to do next. He asked a prominent financial advisor to help him plan out his financial future, and was disappointed when the advisor gave him a detailed retirement projection instead. "I said, 'This is absolutely not accurate,' " Duran recalls. " 'You have no idea what inflation is going to be or what is going to happen to my income.' He said, 'Well, you said you were going to start making money in a few years.' I told him that I really had no idea if that was true, and I didn't know whether I would be making a lot or a little. That company might fail or it might succeed. There is no way this path is going to end up being the true path, and anyway, what I wanted was help making decisions, not a forecast of my net worth."

EUREKA!

At the same time, Duran's mother inherited more than $2 million, and she asked her son for advice. "I said, 'What do you want to know?' And she said, 'I want to know what this money means to me. Can I take the kids to Europe? Can I buy a second home?' I didn't dare send her anywhere," he says. "I didn't know a planning firm that would help her understand the implications of the choices she was making, that would be there to help her make good financial decisions, with a consistent methodology, in a no-conflict relationship."

I would like to report that Duran had an instant flash of insight as a result of these experiences. But the truth is he was mostly discouraged that he couldn't get, or recommend, the kind of advice that he wanted. Then, one sleepless night, he was struck by the thought that lawyers and doctors and accountants are all paid to help their clients make good decisions. Wouldn't the financial services profession go in the same direction someday?

"I had been looking at the next wave all along, but wasn't seeing it," he says. The first wave was a shift from selling investment products and calling it portfolio management to actually managing client portfolios for a fee. The next wave, the one Duran believes we are in the early stages of now, is moving from doing a retirement forecast and then focusing primarily on the assets, to doing planning for a fee and focusing most of the professional attention on the client.

"As I started United Capital," Duran says, "I found myself having exactly the same conversations that I had been having with people 20 years ago. They would tell me, 'I am already doing that.' And I would say, 'But do you actually do it? If you're truly providing this service, then tell me what is the single most important thing for each of your clients, that wakes them up every day when they think about money? What is driving their financial decisions?'

"In almost every case, they had no clear answer," Duran adds. "And I would say to them, 'If you cannot answer that question, please don't tell me that you are doing a good job in this service. If you don't know the answer to that question, you cannot possibly be delivering on the promise of helping them maximize their lives. You don't even know where they want their lives to go.' "

Just as with Genworth, Duran is not in the business of providing this service himself, but rather facilitates it. Advisors join his firm, exchange shares of their individual practice for shares of United Capital, gain access to a consolidated back-office and asset management platform, and buy into the crazy idea that they will focus on planning work for their clients.

"I've had people tell me that clients won't pay for that service," Duran says. "And I say, 'Did you ask them?' Our advisors always ask their potential clients, right up front, for permission to charge fees for financial planning. They say, 'Here is what we would like to do, it is holistic in nature, would you have an interest?' And 90% of the time, the answer is, 'Yes, absolutely.' You would pay for that? 'Yes, of course I would.' "

CRYSTAL BALL CLEAR

The future is created by the crazies, and Duran cheerfully embraces the label. His goal is to create a national planning firm with an emphasis on planning. United Capital has grown to $70 million in revenues last year from $25 million three years ago; $8 million of that is pure advice fees. Advisory offices share in the profits and expect to take market share from the advice models that are furthest from participating in the new wave.

"I want to be the giant slayer," Duran says. "I want to wipe out the way Merrill and UBS and all those big firms do business under the ancient model. We're going to start with a small group of lunatics," he adds, "and hopefully a few more will like our approach."

Bob Veres, a Financial Planning columnist, publishes the Inside Information website and newsletter for advisors at bobveres.com. Post your comments on Financial Planning'sdiscussion boards at financial-planning.com/forums. Readers can also send feedback to bob@bobveres.com.